Scandal of 'phantom' aid money

Well-heeled consultants and companies in the west are the beneficiaries of a global aid system which results in less than 40p in every pound helping to eradicate poverty in the developing world, according to a report out today.

Just over a month before Britain will make a doubling of aid a centrepiece of the Gleneagles summit, the charity ActionAid said the bulk of the money currently allocated was wasted, misdirected or recycled within rich countries.

It found that 61% of aid flows were "phantom" rather than "real" - rising to almost 90% in the case of France and the United States.

The report accused rich countries of "political grandstanding" and highlighted the ways in which they were disguising how real aid flows were even lower than they appeared to be.

"Failure to target aid at the poorest countries, runaway spending on overpriced technical assistance from international consultants, tying aid to purchases from donor countries' own firms, cumbersome and ill-coordinated planning, implementation, monitoring and reporting requirements, excessive administrative costs, late and partial disbursements, double counting of debt relief, and aid spending on immigration services all deflate the value of aid," the charity said.

Compared with a UN target of spending 0.7%, rich countries were ostensibly spending 0.25% of their national income on aid each year. The figure came down to 0.1% when "phantom" aid was stripped out.

The G7 countries - Britain, the US, Germany, Italy, France, Canada and Japan - spent only 0.07% of national income on real aid and would need a tenfold increase to hit the UN target, ActionAid said.

Britain, according to the research, is one of the better performing countries, but still allows 29% of the money spent by the Department for International Development (DfID) to be squandered on "phantom" aid. The UK was spending 0.24% of gross domestic product on "real" aid in 2003.

The report quotes a DfID official as saying that foreign experts giving technical advice in Vietnam, for example, are paid $18,000-$27,000 (about £9,900 -£14,800) a month, compared with $1,500-$3,000 for local experts.

DfID rejected the report's findings. "It's simply nonsense to suggest that a third of UK aid is 'phantom'," said Hilary Benn, the international development secretary. "ActionAid's figures just don't stack up. It's absurd to argue that debt relief, or practical advice from technical experts, isn't real aid."

He did, however, accept that there was a need for more and better aid and said the UK was working with other donors to avoid duplication and waste.

ActionAid said the report did not invalidate the need for more financial assistance, saying that where aid was deliv-ered it was helping to tackle poverty.

It called for a new international agreement that would see money spent where it was needed rather than on business class flights for western consultants. It said three quarters of the money spent on technical assistance was wasted on inflated salaries for consultants flown in to advise poor countries.

The authors of the report, Romilly Greenhill and Patrick Watt, said their figures were not precise because of the paucity of data. They added, however, that they had tended to be over-generous to donors and that the true scale of the challenge might be even greater than that highlighted.

In order to arrive at their figures, they deflated the value of official aid to take account of donor practices that reduced its effectiveness.

The charity said its proposal for an international aid agreement, run by the United Nations, would make aid more accountable. An agreement should involve clear policies on criteria for accepting aid, mutual commitments in place of one-sided conditionality, national and international forums where donors and recipients would review progress on an equal footing, and new mechanisms to increase substantially the volume and predictability of aid.

The report adds: "Donors have signed up to numerous international agreements to improve the quality of their aid. Yet this agenda has made little headway. At the heart of this failure there lies a lack of accountability on the part of donors for either the amount of aid they commit, or the quality of that aid."

Donors, it said, continued to restrict the ability of developing countries "to plot their own development paths".

And the rich get richer...

· Just 11% of French aid is genuine, says Action Aid. France spends nearly $2bn on technical assistance and $0.5bn on refugee costs in France. Debt relief, an accounting exercise, is 40%

· Of US aid, 86 cents in the dollar is phantom, largely because it is tied to the purchase of American goods and services. George Bush's Aids drugs plan excludes cheaper, generic drugs, so giving lucrative contracts to US pharmaceutical companies but treating fewer patients

· Of Japanese aid to Vietnam, 86% is spent on infrastructure projects because Vietnam is a key market for Japanese exports. These projects tend to be found in areas where Japanese firms operate

· In Cambodia, donors spent between $50m and $70m on 700 international consultants in 2002 - equivalent to the wage bill for 160,000 Cambodian civil servants

· UK DfID officials posted overseas get allowances for business class flights, which can be transferred towards holiday flights. DfID administrative costs, at 11.5%, are well above the 8% ceiling allowed by DfID in its funding agreements with NGOs